By: Kevin Sollitt
At the end of today’s trading we note the following directional price changes since last night’s NY close:
Crude oil: Positive
Gold, Silver, Palladium: Positive
DJIA: Positive
DXY: Positive
Can anyone remember the last time this occurred with such a calm market reaction, even allowing for a partial holiday?
Initial theories seem to be that risk is back on and global recovery is in full swing, which are plausible, albeit remotely at this early stage. However as yesterday’s Cable commentary sought to expose, the currency market of late has been somewhat of an indicator to the true underlying picture, with certain behavioral traits in certain crosses providing valuable clues to the next moves.
Example-the crosses that may normally be expected to characterize or verify that risk is indeed back with a vengeance, being the usual suspects of AUD/JPY, EUR/JPY, GBP/JPY or NZD/JPY, did not in fact react in tandem with today’s price action in other asset markets. In fact they all fell, which hints to us that correlations are showing immediate signs of breaking-down.
It was an interesting day with BoE Governor King raising inflation forecasts then admitting recovery will be slow -“au revoir” Sterling in an overbought market. We know that ECB officials and EU politicians are unhappy with EUR/JPY strength and it was probably only the lack of jawboning that prevented EUR/JPY falling precipitously given the fierce rejection of the 1.5025-1.5050 regions in EUR/USD, again.
As yet we have not seen the AUD or NZD statistical releases scheduled for tonight (Employment and Retail Sales, respectively) but in each case there is now more than a fair chance that these data will be studied closely for signs that the currencies are fully valued. In fact it’s probably fair to say that the numbers will need to blow away expectations on the topside to even sustain present lofty valuations. Add into the mix the fact that the RBNZ are alluding to the NZD being at unsustainable levels and a potentially interesting plot thickens.
To continue: China is talking about adjusting its USD peg somehow and Treasury Secretary Geithner is expounding on the strong Dollar policy while encouraging more flexibility from Asian trading partners. Indeed some reports allude to the fact that China normally keeps its word on such matters. To say the least, pointed comments of this nature sound to us like major clues to a not-so-subtle shift in policy that may be a lot closer than we currently realise. If our theory is correct that officials are now talking with a backdrop that in the global economy we are literally all in it together, the playing field could be about to get levelled. Counter-intuitively, a CNY adjustment although conceivably USD negative may somehow conspire to slow down the pace of asset diversification into other currencies, which would very much suit the ECB, for one and lead to unwinding of short USD positions, except against the CNY, of course.
For this reason and the fact that central banks like the RBA may already be ahead of the curve given lackluster global recovery and the RBNZ saying as recently as last month that rates are on hold until the middle of 2010, we suspect that the bull cycles in both AUD & NZD crosses are very close to an end with the added bonus of the carry trades in these pairs being crowded.
We note with interest the failure so far of the AUD/USD to breach its August 2008 high of 0.9347 but would not stand in the way of it just yet as there’s still a risk of a frothy rally on further good data. Rather we prefer to place a stop-entry on a break below 89 cents, with a target of 7900 via interim support at the (rising) 100 day sma at 8550.
This is a strategic idea; in any event recommend placing a stop-loss 150 pips above entry, with profit targets as above. Trail the stop at 8550 when hit.
Good trading.